Mortgages explained

How you can borrow to buy your home – how mortgages work

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Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Your mortgage guide

Choosing the right mortgage will help you buy a home and could save you thousands of pounds. 

Here is everything you need to know about the mortgage process and how to find the right one for you.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

What’s a mortgage?

A mortgage is a loan from a bank or building society that lets you buy a property. It is a secured loan which means the bank will own part of your home until you have paid off the mortgage in full.

How do mortgages work?

Once you get a mortgage, you then pay back the amount you have borrowed plus interest over a period of around 25 years, although you can take mortgages out in the UK over longer or shorter terms.

The mortgage is secured against your property until you have paid it off in full. This means the lender could repossess your home if you fail to repay it.

In the UK you can get a mortgage on your own or you can take out  a joint mortgage with one or more people.

How do mortgage deposits work?

A deposit is a down payment, you have to pay for part of the property yourself, and this amount is called the deposit.

A deposit is a percentage of the property's value, so if you bought a house for £200,000, a 10% deposit would come to £20,000.

Your mortgage provider will lend you the remaining 90% of the purchase price. 

This is what is known as the Loan-to-Value (LTV). 

It measures the percentage of the property price that you will need to borrow to make the purchase. 

In the above example a 90% LTV mortgage would cover the remaining £180,000, which would be the amount you owe your lender.

A 95% mortgage would mean you would put down a 5% deposit – or £10,000, meaning you would borrow a mortgage of £190,000.

Where can you find a mortgage?

Mortgages are offered by financial companies; most UK mortgages are lent by banks and building societies.

There are two ways you can source your mortgage

Direct

You can get a mortgage directly from the lender; use our comparisons to find the right one.

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Through a broker

You could also find a mortgage and get advice from a mortgage broker or independent financial adviser. Some are whole of market, which means they can offer mortgages from every lender, and some offer exclusive deals.

What type of mortgage do I need?

There are many different types of mortgage, each designed for different financial circumstances.

Here is how to work out what type of mortgage is right for you.

Mortgages if you are a first-time buyer 

First time buyer mortgages can let you buy a home even if you have a small deposit. Here is everything you need to know about getting your first mortgage. There are also specific mortgages and schemes aimed at helping first time buyers purchase their first home

Help to Buy mortgages 

These can improve your chances of buying a home if you have a small deposit with help from the government. Here is how Help to Buy works.

Right to Buy

This scheme lets you buy your council house at a discounted price, and you can use the discount as part of your deposit. Here is how Right to Buy works.

Guarantor mortgages 

These mortgages could help you buy a property with a small deposit if a relative or friend is willing to be named on the mortgage with you and make any payments you miss. Here are how guarantor mortgages work and how to get one.

What other types of mortgage are there?

Bad credit or sub-prime mortgages Mortgages for bad credit could let you buy a home even if you have had financial difficulties in the past. Here is how to get a mortgage with bad credit.

100% mortgages Mortgages with no deposit are not offered unless you have a guarantor named on the mortgage too. However, it can still be possible to get on the property ladder if you have a very small deposit saved; this guide explains how.

Self employed mortgages are for if you run your own business or have an income that is hard to prove to lenders. Here is how to get a self-employed mortgage.

Commercial mortgages let you buy property for your business or as an investment. Here is how to get a mortgage for your business.

Mortgages for older borrowers could accept you even if you are over the maximum age specified by most lenders; here is how to find one.

Mortgage for specific purposes

Buy to let mortgages let you purchase a property you intend to rent out to someone else. Here is everything you need to know about buy to let mortgages.

Second mortgages let you purchase a property other than your main residence, like holiday homes or investment properties. Compare second mortgages.

Lifetime and equity release mortgages give you cash in return for equity in your home, which is paid back when your home is sold. Here is how they work.

Commercial mortgages let you purchase property used by businesses.

Bridging loans which also let you borrow using your property as security, these can be used to buy another property, or refurbish a property, or even act as a short-term mortgage or ‘bridge;’ while you are waiting for the sale of a property to go ahead.

What are interest only and repayment mortgages?

Most mortgages are repayment mortgages. Your monthly payments will go towards both the interest charged on your mortgage and clearing the outstanding balance. By the end of the mortgage term you will have paid off the full amount you borrowed.

If you get an interest-only mortgage, your monthly repayments only cover the interest owed, so your balance will not go down. At the end of the term you will need to pay off the full balance, so you will need to have saved up this amount separately using a repayment vehicle like savings, shares, an ISA or investment.

What is the difference between interest only and repayment mortgages?

How much does a mortgage cost?

The amount you have to pay each month and in total over the life of your mortgage depends on the deal you get and the cost of the property.

Here are the costs of a mortgage explained in detail and how to work out if you can afford one. The main costs are:

Interest 

The interest rate will affect how much you have to repay overall and what you pay each month.

It is accrued across the lifetime of the mortgage and is charged as a percentage rate on the amount you owe.

For example, if you took out a £200,000 mortgage with an interest of 4% over 25 years, you could pay interest of about £116,702 and repay a total of £316,702.

The mortgage in the above example could cost around:

  • £1,056 per month with an interest rate of 4%

  • £1,289 per month at 5%

You can work out how much interest would cost on a mortgage for the amount you need. HSBC's interest calculator shows the amount you would have to pay each month, the total interest amount and an illustration of how much of the balance you would pay off each year.

Mortgage fees

Product fees are charged for taking out the mortgage

  • Application fees can be charged when you apply for a mortgage, whether you end up taking it out or not

  • Valuation fees may be charged by your lender for working out how much your property is worth

  • Higher lending charges come with some mortgages if you have a small deposit

  • Telegraphic transfer fees are charged when the bank transfers the money they are lending to you (usually to your solicitor)

  • Broker fees can be charged if you take out a mortgage recommended by a broker

You may also have to pay fees on your old mortgage:

  • Early repayments charges if you pay it off before the end of its term

  • Exit fees are charged on some mortgages when you move to a new lender

What happens if you miss mortgage repayments?

Once you have your mortgage, missing repayments will usually mean you will be charged a fee by your lender, pushing up the total amount you owe.

Should I get a fixed or variable mortgage?

There are several different ways that mortgages can set their interest rates:

Variable mortgages can change their interest rate at any point, although they usually rise and fall roughly in line with the Bank of England base rate.

Fixed rate mortgages guarantee that their interest rates will not change for a set period, usually between one and five years.

Tracker mortgages have variable rates that follow the Bank of England base rate exactly. A mortgage set at 2% above the base rate would be 2.5% with the base rate at 0.5%. If the base rate later went up to 1%, the mortgage rate would change to 3%.

Discount mortgages offer a rate set at around one or two percent less than the lender's standard variable rate. The rate will rise and fall with the lender's standard variable rate, and the discount will last for a set period of a year or more.

Should you get a fixed, variable or tracker mortgage?

How do I get a mortgage?

You will need to:

What is the mortgage process?

After you have done all the above, you will then be able to buy your new home, although you will need a solicitor to handle searches, surveys and contracts.

Here is our comprehensive guide to the full process of buying a new home.

Will you be accepted for a mortgage?

Mortgage lenders all have different standards and requirements. The following factors will affect whether lenders will offer you a mortgage and how much they will be willing to lend to you:

  • The value of the property

  • Your deposit

  • Your age

  • The length of the mortgage term

  • Your credit record

  • Your income

  • If you are applying solely or jointly

This guide explains how lenders decide and if you can afford a mortgage.

How to manage your new mortgage

Once you move into your new home you will need to start making monthly repayments on your mortgage. If you miss any payments, the amount you owe could increase and your credit record could be damaged. If you fall too far behind your lender could repossess your house.

If you set up a direct debit to pay your mortgage, you will never miss a payment as long as there is enough money in your bank account.

How to keep affording your mortgage

Aim to have six months’ worth of mortgage payments as well as basic household expenses – such as bills and food set aside in a savings account that can be assessed in an emergency.

Even having a couple of months’ worth of expenses in savings can give you breathing space in case you lose your job or your circumstances change.

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Here are some more tips on  how to manage your mortgage so you can keep up with your repayments and make sure you are always on the best deal.

If you're a first-time buyer or looking to move home or remortgage, we can help you find the best mortgage deal to suit your needs.

If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.